With equity indices now crossing into bear market territory, it's easy to get anxious seeing your account balance rise and fall several percent each day. Although the situation we face today is unique (coronavirus containment, oil price war, etc.), this type of market environment isn't. For well-prepared, long-term investors, now is a time to stay the course while evaluating potential opportunities as assets become oversold. Below we offer a series of charts detailing historical parallels and supporting the case for diversified portfolios.
The table below details the last several bear (or close to it) market drawdowns dating back to 1987. While you often hear about the magnitude of the drawdown (red numbers), what's less discussed is the next 12-months or the green numbers. Many of the best all-time trading days come within a month of the worst trading days and sitting out from these best days can have a material impact on long-term performance.
S&P 500 Biggest Declines and Following 12-Month Performance
It's tempting to try to time the market, but that requires two important timing decisions - when to sell and when to buy. A few small miscalculations of either move can have a significant impact on results. As seen below, missing out on just the market's top ten performing days over the past 20 years would cut the gains on a $100,000 investment by about half.
Impact on a $100,000 Portfolio of Missing the Market's Best Days
Looking back over the past decade, or century for that matter, there have been plenty of excuses to sell stocks. Just over the past bull market, we've had the Greek Debt Crisis, the introduction of negative interest rates, an Ebola outbreak, Brexit, and a global trade war - just to name a few. Among all of this, stock markets have still managed to produce impressive gains.
Many will offer opinions, but our view is that it's nearly impossible to predict how this crisis will unfold. What's perhaps more likely, is that volatility will remain elevated in the coming weeks and potentially months. Given this framework, our belief in diversified portfolios remain.
The Case for Diversification: S&P 500 Index vs. Diversified 60/40 Stock/Bond Portfolio
Conclusion: Living through these periods of market uncertainty is rarely a fun exercise but will occur occasionally. It's important to remain calm and stay focused on the long-term.
For more information or to discuss further, please email me or call me at 203.409.1270.
Michael Aloi is a CERTIFIED FINANCIAL PLANNER™ Practitioner and Accredited Wealth Management Advisor℠ with Summit Financial, LLC in Stratford, CT.
Disclaimer: Summit Financial, LLC. is a SEC Registered Investment Adviser ("Summit"), headquartered at 4 Campus Drive, Parsippany, NJ 07054, Tel. 973-285-3600. It is provided for your information and guidance and is not intended as specific advice and does not constitute an offer to sell securities. Summit is an investment adviser and offers asset management and financial planning services. Indices are unmanaged and cannot be invested into directly. Data in this report is obtained from sources which we, and our suppliers, believe to be reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. The Standard & Poor's 500 Index (S&P 500) is an unmanaged group of securities considered to be representative of the stock market; the MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index designed to measure the equity market performance of developed markets, excluding the U.S. and Canada; the Bloomberg Barclays U.S. Aggregate Bond Index is a market capitalization-weighted index comprising Treasury securities, Government agency bonds, mortgage backed bonds, corporate bonds, and some foreign bonds traded in the U.S.; The Russell 2000 Index is a market-cap weighted index comprised of the smallest 2,000 companies within the Russell 3000 Index. Consult your financial professional before making any investment decision. Past performance is no guarantee of future results. Diversification/asset allocation does not ensure a profit or guarantee against a loss.